Can Profits Be Canned From a Mediocre Guidance?

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Company guidance need not be that rosy to whet investor interest. Take the case of Rexam (NASDAQOTH: REXMY). Share prices of this beverage-can manufacturer were, for the most part, eking out incremental advances following its June 25 warning of lower-than-expected first-half profit. The apparent contrarian investing at play here looks founded on a sound footing.

Also listed on the London Stock Exchange, Rexam disclosed “disappointing” volume growth in South America and Europe in April and May. With its performance continuing strong in North America, the company still anticipates an improvement in its full year results over 2012, although at a level likely to be lower than previous estimates.

Sole focus on cans

Rexam, one of the top global manufacturers of beverage cans, appears to have drawn positive market sentiment from the sale that the company has initiated on its manufacturing rigid plastic packaging for healthcare applications division. This initiative will result in a sharper focus on beverage can production, particularly with Rexam’s new presence in emerging markets. Based in Dubai, this sector not only has plants in India, Egypt, and Turkey, but also a joint venture in South Korea.

Deployment of the proceeds from the healthcare packaging unit is still being decided. The company, however, said progress has been good in its pursuit of beverage can opportunities in the faster-growing markets in the Middle East, Central America, and Southeast Asia.

Taking the path where more colas sell

Recent gains in the emerging markets by the top customers of Rexam in the beverage industry also portend the tailwinds for the company. That beverage consumption is growing exponentially with the rising disposable income in these markets was evident in the first quarter results of Coca-Cola (NYSE: KO), a major Rexam customer.

Coke’s international business registered a robust 5% year-over-year volume growth for the quarter, driven by gains in key emerging markets such as Thailand and India, which registered increases of 18% and 8%, respectively. A 15% volume growth was likewise registered for Coca-Cola in the Middle East and Africa.

Pepsi (NYSE: PEP), another Rexam customer, also had an earnings beat in the first quarter, boosted by the beverage sales in its combined Asia, Middle East, and Africa segment. The global snack and beverage firm’s EPS for the quarter rose 12% year over year to $0.77, which is well ahead of the Wall Street consensus forecast of $0.71.

Where the consumer clout is

Increasing penetration level in emerging markets is critical for mass consumer companies like Pepsi and Coke. It is estimated that 86% of the world’s consumers are in the developing economies like those in Asia, Africa, and South America, and consumer spending is rising much faster in these regions than in the mature markets of the West.

Coca-Cola, hence, has adopted disciplined marketing strategies focused on increasing brand value in order to achieve higher volumes and increase market share in emerging markets. The headway Coke has achieved was manifested in its No. 1 ranking in 2013 as the most chosen consumer brand, propelled by a 7% gain (up 230 million) in its consumer reach points in emerging markets where it reaches 37% of households.

Pepsi, playing catch-up to Coke in the emerging markets, has upped its ad spend via such high-profile campaigns as “Live for Now.” The company is likewise sponsoring major sports events as part of its marketing strategy in developing markets

Fundamental strengths

It is important to note that beverage manufacturers rarely shift can suppliers with their supply contracts bound by long-term deals. The big global can manufacturers likewise tend to avoid each other geographically to avert price wars detrimental to their profit margins.

Smart can packaging, a product of Rexam’s culture in innovation, is another source of strength for the company not only in the emerging markets but also in the developed territories as well. In South America, the beverage firm New Age has tapped Rexam for the development of a can with thermochromic ink. The can’s innovative ink turns green, red, or blue in a unique artwork indicating the optimum drinking temperature for the beverage. For the Peruvian beer Cusqueña brewed by Backus, Rexam has likewise developed a stylish can sporting a “wet look” through an innovative combination of ink and varnish.

Thirst-quenching takeaway

Rexam’s current valuation of nearly 4% below its 52-week high of $41.97 looks like an excellent opportunity for a position in this equity which has a consensus one-year target price of $47.94. Although the company may have fallen short of its 9% year on year earnings growth in its most recent quarter, Rexam has a robust strategy to maximize shareholder value for the long-term through its sole focus on beverage can manufacturing. Having taken assertive actions on costs to lessen the impact of lower than anticipated volumes, the company likewise realized a trailing 12-month operating margin of 11.11%, the highest among the major global players in the beverage can manufacturing industry.

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Arturo Cuevas has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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